Landlord Forced To Pay Millions in Tenant Lawsuit

Linda and Edgar Reinoso own and manage numerous apartment complexes in Lancaster County, California, and recently settled a lawsuit brought by tenants for substandard living conditions in one …

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Linda and Edgar Reinoso own and manage numerous apartment complexes in Lancaster County, California, and recently settled a lawsuit brought by tenants for substandard living conditions in one of their units. The Reinoso’s filed a claim with their insurance company, which subsequently saw the matter through court to a settlement of $3 million. The insurance company then sued the Reinoso’s, claiming their liability insurance would not cover the damages costs or the settlement because they were aware of the conditions. Linda Reinoso appealed and the high court affirmed the verdict. For more on this continue reading the following article from JDSupra.

A court of appeal recently held that an alleged slumlord was not covered by liability insurance in connection with her tenants’ claims of substandard living conditions and that the landlord’s insurer could recover from the landlord the amount it paid to settle the tenants’ lawsuit.  (Axis Surplus Insurance Company v. Reinoso (— Cal.Rptr.3d —-, Cal.App. 2 Dist., August 3, 2012).  Because the landlord was well aware of the substandard conditions, the tenants’ injuries were not considered to be accidents covered by the policy.

Facts

Edgar and Linda Reinoso own and manage approximately 75 rental properties.  Edgar twice pleaded no contest to charges related to dangerous conditions at his rental properties.  After the Reinosos acquired a 48-unit apartment complex in Lancaster (the “Apartments”), the City of Lancaster found several code violations including pest infestations, general dilapidation, and lack of proper water and heat.  The tenants of the Apartments brought a lawsuit against the apartments’ former owner, the Reinosos, and their management company alleging substandard housing conditions.  The Reinosos tendered the defense of the tenants’ lawsuit to their insurer, Axis Surplus Insurance Company (“Axis”).  Axis agreed to represent the Reinosos and their management company in the lawsuit under a reservation of rights.  The lawsuit was settled for over $3,000,000.  Axis contributed $2,162,500 to the settlement.

Axis brought a lawsuit against the Reinosos to recover the money it spent to defend and settle the tenants’ lawsuit.  The trial court ordered the Reinosos and the management company to pay Axis $2,143,000 because the tenants’ claims were not covered by the Reinosos’ insurance policy.  Linda Reinoso appealed the trial court’s order.

Decision

The court of appeal affirmed the trial court’s holding that Linda Reinoso was not insured for her acts.  Linda Reinoso claimed that she did not expect the tenants to be injured, and therefore any injuries would be accidents under the insurance policy, and she should be covered as an “innocent” insured.  The evidence revealed Linda Reinoso was not an “innocent” insured because she knew of the substandard conditions at the Apartments.  She obtained this knowledge by working with Edgar Reinoso on a full-time basis since 1990 purchasing and managing real estate, by owning and managing apartments with Edgar Reinoso, including the Apartments, by paying the utility bills for the complex, and by her knowledge that Edgar had been twice prosecuted for deficiencies at other apartment complexes. 

The court of appeal also rejected Linda Reinoso’s argument that the reimbursement amount to Axis should be separately allocated among Linda, Edgar, and its management company, rather than each person being ordered to pay the entire amount jointly and severally.  Because Linda Reinoso was co-owner of the Apartments and she participated in the management of the property, she is jointly and severally liable for the damages payable to the tenants. 

Questions

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This article was republished with permission from JDSupra.

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